Perspective, Gratitude, and Feeding the Bear

Well, it looks like some normalcy has returned to the markets. After 18 months of steady stock market gains in one of the lowest periods of market volatility in history, we are starting to experience some discomfort. The financial media has been their typical self and have done a good job of reporting just how normal (sarcasm) the downward swings are. Here are some actual headlines over the past week:

  • Dow Experiences Biggest Point Drop in History
  • S&P 500, Dow Suffer Biggest Weekly Decline in More than 2 Years
  • The Dow Jones Industrial Average Crash Raises One Question: Is the World Ending?
  • Market on course for 6% drop, biggest one-week fall since 2008

I don’t want to discount the downturn. Yes, the 1,100-point drop in the Dow on Monday was the largest in history. However, on a percentage basis, which is what investors should be looking at, it was the 538th largest decline in history. This of course, doesn’t make a for a good story. If I was a headline writer, here is what I would have written (and subsequently receive zero clicks, leading to a prompt termination):

  • Dow Experiences 25th Worst Loss since 1960
  • S&P 500 Declines to Levels Not Seen Since November 20th – Yes, 2.5 Months Ago
  • The World Fails to End…Again
  • Market Drops 6% in One Week after Increasing 234% over 9 Years

What happened in the markets over the last week can be scary but it’s also normal. The S&P 500 and Dow has officially reached “correction” level which is defined as a 10% downward movement from peak to trough. A drop of this magnitude in such a short period of time should not be discounted. However, it also need to be into perspective. This is the 91st time a 10% correction has occurred since 1928. If stocks fall another 10%, which is entirely possible, it wouldn’t be outside of the norm either. A 20% drop, officially a bear market, would be the 22nd since 1928.


No panic here

One lesson I learned over the past week is that I have the best group of clients an advisor can ask for. Although small in terms of quantity, they are robust in composure. A parent at my child’s school said to me yesterday, “Man…your phone must be overheating.”




Quite the opposite actually. I didn’t receive one phone call, text, or e-mail. My clients were not worried. Nor were they surprised. In fact, they frankly didn’t care. Instead of worrying about markets they can’t control, they were busy controlling what they could — yelling at their kids, enjoying the perfectly normal February sunshine, and debating what wine to drink with barbeque (Syrah…or better yet, beer). It was the same attitude I had which tells me that I’m blessed to be in a bunch of perfect marriages.

The biggest investing mistakes usually made are emotional, all-or-nothing decisions when the market is in free-fall. A necessary part of a good advisors where he or she adds the most amount of value is talking their clients off the ledge. While I’m prepared to have this conversation, given the strong bull market, I haven’t had to. This was my first opportunity and it hasn’t been necessary. In fact, a strong stomach from my clients opens up the door to some tremendous opportunity –taking advantage of a downturn.


Strategy to feed the bear

“We’re rich because we were smart when others were dumb” – Charlie Munger, Vice Chairman of Berkshire Hathaway


The above isn’t an exact quote. I’m paraphrasing something I heard Warren Buffet’s partner say during one of Berkshire Hathaway’s annual meetings. Nonetheless, his point is valid — the best time to buy stocks is during times of panic.


However, this is easier said than done. Buying low makes complete sense and every investor can’t wait to do just that. The reality is that when asset prices fall they become sellers rather than buyers.


A 10% drop from arguably extended valuation levels is not exactly a buying opportunity of a lifetime. That likely occurred in 2008 and 2009 and it’s a market we likely won’t see again during our lifetime. However, today is a better buying point then last week, and the odds that the market will be higher 5 years from now has increased.


According to research from financial columnist Morgan Housel, after a 10% drop from its peak, stocks are higher in five years 86% of the time. The average return during those five years is 51%. After a 20% drop, those numbers increase to 89% and 61% respectively. Logically, the larger the drop, the higher future returns will be. And there’s a higher probability of achieving those higher returns. That’s not a bad deal.

Five years from now, the markets most likely will have made some gains
Source: The Motley Fool


While logic states you should deploy your cash now, the fear of regret is going to overpower logic. Here are some perfectly normal thoughts you may be having right now:


What if the market drops even further? It’s too early to start buying.

This feels a lot like 2000 and 2008. What if we have another crash? I don’t want to feel that pain again.

This time, I’m going to be aggressive when others panic.


The market may continue to fall. It might not. If you invest your reserves now and it falls further, you’ll be kicking yourself. If it doesn’t, and you don’t buy, you’ll be kicking yourself.


To be a successful investor, you don’t need to time the markets. You need to control your behavior. Therefore, you need a strategy that’s rule-based, taking the emotion out of your investing decision. Let’s say you have $10,000 in dry powder that you are ready to invest during a downturn. Instead of investing it all in one chunk or waiting too long, a rules-based strategy on deploying a set amount at various drawdowns is a sound strategy. The approach I’m going to show you is adopted from Morgan Housel who articulates it much better than I in this article. Here is a summary:


Market falls You invest… Historical Frequency
10% $1,000 About once a year
15% $2,000 Every 2 years
20% $3,000 Every 4 years
30% $2,000 Every decade
40% $1,000 Few times in an investing lifetime
50% $1,000 Once in an investing lifetime


With the strategy above, more than half your available funds will be invested after a 20% decline. Larger declines are rarer, so it makes sense to invest sooner rather than later. However, in the event that the market continues its descent, you’ll still be able to take advantage of lower prices.


Significant wealth can be created during bear markets which fortunately, yes fortunately, also occur pretty regularly. We haven’t had a 20% decline since 2009, twice as long as the average frequency. While not predictable, it shouldn’t be surprising if such a drawdown occurs again.


Whether this strategy is followed with the precision of an olympian archer is not important. What is important is prepared and having a strategy. A simple plan will alleviate mental stress which in turn, leads to less hasty decisions and ultimately, better returns.

Allow me to help you create a portfolio built for a bull or bear market. Get started today by clicking the link below for a FREE portfolio review.

2 Last Minute Financial Gifts that Keep on Giving

There are 4 days left until Christmas. You’ve been meaning to shop for your niece but keep ending up buying scarves and gadgets for yourself. Not to worry, there’s still time. You can order the Shimmer and Shine Magical Light-Up Genie Play Set by December 22nd on Amazon Prime and have it shipped to your door by Christmas Eve. However, if your niece, nephew, son, daughter, or grandchild is anything like my children, the joy of a new toy will wear off quick. By mid-January, Shimmer’s palace will look more like a foreclosed apartment and Shine’s teacup will be buried with last year’s Lego set.

This year, why not do something that will last a little longer? Give them a gift they will not care about one single bit. You’ll probably lose your “World’s Greatest Uncle or Aunt” title. However, when they are off to college, starting a family, or looking to buy a home — you will be adored. What is this magical gift?

An iPhone X.

Or not. If you are looking to give a gift that will pay dividends a decade from now, try dividend stocks. If you are looking to provide that special child in your life with the opportunity to become empowered, have a stronger of sense of self, meet lifelong friends, and increase their earnings potential, help pay for their college.

Sure, both ideas aren’t as sexy as a new toy or $1,000 cell phone but they won’t end up in a donation bin either. And best of all, there’s still time to stuff their stockings by December 25.

Purchase brand name dividend stocks

While the price tag of the latest iPhone is $999, the true cost of owning the latest hot gadget from Apple is much more. A data plan will set you back about $70 per month. Then there’s app purchases, music subscriptions, and broken screens. In 2 years, it will be time to fork over another $1,000 to upgrade. Let’s say you buy your 12-year-old a new phone and pay for their service until they are 18 (why couldn’t you be my Mom or Dad). During that time, you paid $1,000 per phone, $70 per month on carrier charges and app purchases, and upgraded twice. Your true cost over 6 years is a whopping $8,040 or $1,840 per year.

Now in typical financial junkie form, let’s look at what happens if you buy them Apple shares or better yet, a basket of brand name stocks with that money every year. Using a conservative rate of return of 6%, investing rather than spending will net your loved one nearly $14,000 over six years. Your child will be better off by $22,000 since you’ll be saving over $8,000 in phone payments — enough for the first-year of tuition at UC San Diego with money to spare for flights back home (or for you to go to the beach).

Of course, not everyone is ready to fork over nearly $2,000 a year as a gift for someone else. You can still invest in brands kids love and at much lower price tags. And you can do this by Christmas. By opening a custodian account online for your soon-to-be-rich child, you can be ready to invest in minutes. Many brokers, such as Ally Invest or TD Ameritrade don’t have account minimums. With trading fees as low as $4.95, you don’t need thousands to invest. You can invest as little as $4.95. Of course, that would mean you enjoy throwing money away. A rule of thumb I like to use is not to exceed more than 2% of your trading commissions for any investment. Ally Invest charges a trading commission of $4.95 while TD Ameritrade starts at $6.95. With fees that low, you can get an investment account started for as little as $250.

For $250, instead of a new pair of Jordan’s, you can buy 4 shares of Nike stock. Is your kid a Star Wars fan? Disney, the owner of the franchise, is a great brand that will be around when all of us aren’t. Alternatively, Hasbro, is an incredibly well-run business that licenses Disney characters such as Darth Vader. For $270, you can buy 3 shares of Hasbro and receive a generous 2.5% dividend yield.

The dividend is the gift that keeps on giving. Many online brokers allow you to enroll in a Dividend Reinvestment Program, or DRIP. With DRIP, instead of receiving a payout as cash, dividends are used to automatically purchase more stock. This is a great, hands-off approach to compounding wealth over time.

Many beloved brand names that sell products and services kids love pay dividends and make great long-term investments. Below is a list of how some popular names have performed over the last decade along with their dividend yields.

Company 10-year stock return Dividend yield (TTM)
Activision Blizzard (ATVI) 438% 0.5%
Apple (AAPL) 114% 1.4%
Hasbro (HAS) 253% 2.5%
Nike (NKE) 290% 1.2%
Six Flags Entertainment (SIX) 347% 3.9%
Starbucks (SBUX) 244% 1.8%
Walt Disney (DIS) 240% 1.5%
Source: YCharts and Yahoo! Finance

Not only does buying stock in these brands make money, but it is a great strategy to get young children interested in business and investing.

So, go on. Open an account for your niece, nephew, or child today. Just select the UTMA/UGMA account option which gives an adult custody of the account until the child turns at least 18 and up to 25 in California. You can continue to contribute to their account on special occastions such as birthdays, graduation, Bar Mitzvah, and their Quinceanara. You may not win brownie points today. However, ten years from now, you’ll by far be their favorite relative.

Contribute to a 529 plan

Higher education is priceless. It’s an opportunity for the awkward to become legends. Life-long friendships are created. You may even learn to do laundry. It’s priceless — for an average four-year public, in-state cost of $40,000 of course. Expenses can go up significantly from if a child enrolls in a UC or private university.

Given the rapid increase in college tuition, it’s no surprise that many students are leaving college with insurmountable debt levels. Today, there is $1.5 trillion in student debt outstanding. The average monthly student debt payment for those between 20 and 30 years old is $351. When I was going to college, it wasn’t impossible to pay your own way through college. However, students today have a much tougher road than their parents. Even with a full-time job, it’s tough to escape the student loan trap.

However, you can help fix this national catastrophe by doing one small thing — buy your son a Nintendo Switch.

…or you can contribute to their college savings.

A 529 plan is a tax-advantaged savings plan that is designed to help family members put aside money for college. Nearly every state offers a 529 plan and some states offer tax incentives to invest in their own state’s plan. California does not offer a tax deduction but you are able to invest in any state’s plan. In addition to growing tax-free, 529 plans are low-maintenance, give the owner control of the money, offers automatic investment options, and are easy to set-up.

Despite all the benefits of a 529 plan, researching the one that’s right for your child can be quite a task. An ideal plan should have low fees investment options, strong long-term performance, easy-to-select investment options, and a strong team behind the plans. Fortunately, Morningstar has done some of this research for you. From 2011-2017, these funds have consistently ranked as top-tiered 529 plans:

  • Rowe Price College Savings Plan, Alaska
  • Maryland College Investment Plan
  • Vanguard 529 College Savings Plan, Nevada
  • CollegeAdvantage 529 Savings Plan, Ohio
  • CollegeAmerica Plan, Virginia (Advisor-sold)
  • Utah Educational Savings Plan (UESP)

You can’t really go wrong with any of these but my personal favorite is the Utah Educational Savings Plan. It’s where I have both of my children’s college savings invested. Like many plans, the Utah plan allows investors to set it and forget it as investors have four age-based options that get more conservative as the child gets closer to college. UESP also has a solid blend of strong investment performance and low-cost investment options. As an advisor, I favor the Utah plan over others as I can also customize investments for each client. Of course, individual investors can do this on their own too.

The application process to open a 529 plan is simple. You can open an account online in minutes, giving you plenty of time to have it funded by Christmas morning. Your child may not appreciate your generosity today. However, a decade from now, they’ll be singing your praises as they perform their first keg stand.

The holidays are a great time of year for getting together with family and friends. Christmas morning is a memory that will stick with children for the rest of their lives. However, the Grinch would agree with me that memories fade. This year, give the gift that keeps on giving — quality dividend stocks and a contribution to their college savings.

To learn more about custodial accounts, 529 plans, and saving for your child’s future, schedule a complimentary meeting by clicking the icon below.